UESTION 9 Sheet (in millions) Liabilities &Equity; Assets Current Net Fixed $120
ID: 2658371 • Letter: U
Question
UESTION 9 Sheet (in millions) Liabilities &Equity; Assets Current Net Fixed $120 $180 130 Bonds ($1000 Par) Preferred stocks ($100 Par) 50 Common Stock (SI par) 20 Total $200 $200 Total The company's bonds have 9 years to mature, pay 10% coupon rate semi-annually and comparable bonds' YTM is 11%. The company's applicable tax rate is 40% The market price of common stock is $12.50 per share. The common stock dividend has grown at a steady rate from S0.68 in December 2000 to $1.48 in December 2010. The same growth rate is expected to continue for long time in the future. The floatation cost for new common stocks is 15%. The market value of the preferred stock is $75 and it pays quarterly dividend of $1.75. The floatation cost on issuing new preferred stock is 7% Next year is 2011. What is the WACC of the company using the book weights of capital structure (Assuming the company will issue new preferred and common stocks)? 1 1.32% 6.85% 9.12% 10.95% 7.58% 6.67 pointsExplanation / Answer
1) Book weights of the capital structure Amounts in Millions Weights Bonds $130.00 65.00% Preferred Stock $50.00 25.00% Common Stock $20.00 10.00% Total $200.00 100.00% a) Cost of debt 11.00% b) Cost of Preferred stock = Dividend/(Price - floatation Cost) Cost of Preferred stock = $1.75 x 4/($75 - (1 -7%) 10.04% c) Year 2000- 2010 CAGR = [(Ending Value/ Beginning Value)^(1/n)]-1 CAGR = [(1.48/ .68)^(1/10)]-1 8.09% Cost of Equity = Re = (D1 / P0) + g Cost of Equity = Re = [($1.48 x (1+8.09%) /12.50 x (1-15%) ]+ 8.09% 23.14% WACC = We x Re + Wp x Rp + Wd x Rd x (1- tax) WACC = 10% x 23.14% + 25% x 10.04% + 65% x 11% x (1- 40%) 9.12%
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